“Reconstruction Finance Commission” Ruse

(February 1932)

The latest patch to our threadbare capitalist society is being applied. They are now announcing the birth of the “Reconstruction Finance Corporation” Not so many months ago the bankers themselves, at the pronounced initiative of the president, created the National Credit Corporation for the purpose of aiding the weak banks. Admittedly, it has been of little aid. Now, a bigger and broader plan is being put in effect, the R.F.C. The bill providing for the creation of this “patch” specifies a two billion dollar fund to be raised through the sale of bonds ($500,000,000 to be subscribed to by the government) which money will be used to loan money to banks, advance money to the railroads to cover maturing bonds, aid to over-mortgaged farmers, and similar transactions, the essential nature of which is the “thawing out”, for the present holder, of “frozen.” and perhaps even worthless paper. The success or failure of the entire scheme can be established only after a survey of the entire banking situation today.

About three years ago the first rumblings of the present crisis could have been detected by the trained ear – from the ever lessening pounding of the tap hammer, as fewer and fewer rivets were driven home to secure the girders in the many buildings that had been shooting up. Beginning with the construction industry, the wave of depression rolled ever onward, from industry to industry, until now even the mighty banking system of this country has begun to wobble and grow dizzy with the constantly mounting list of casualties.

There are in general three types of banks (aside from Investment Houses, Insurance Companies, Personal Loan Societies, etc. – that have many functions similar to those of banks). They are (1) Mutual Savings Banks – Bowery Savings (2) Commercial Bank – National City (3) Private Banks – J.P. Morgan.

The first two concern us primarily. They are the ones that hold the meager savings of the “well-to-do” worker and small business man. They are the banks that act as the support of the industrialist from the moment of the purchase of his raw materials until the time he secures the returns on the finished product. These banks are the ones, that failing will add a heavy blow to the attempts of the capitalists to rise from their present prostration. These are the banks that the Reconstruction Finance Corp. is to aid.

The Importance of Bank Stability

For savings banks the almost total, and for commercial banks the overwhelming bulk of the liabilities (money the bank owes to other people) are to the depositors. Thus the recent statement of the National City Bank shows out of a total liability of $1,800,000,000, the sum of $1,400,000,000 under the item of deposits. This grand sum came from industrial and commercial concerns who are constantly depositing and withdrawing money to transact their business. On the side of the assets we find a similar item: “short term loans” (for circulating capital) of $912,000,000 out of a total assets of $1,858,000,000 – the largest single item recorded. A failure of a commercial bank means the throwing of a monkey wrench into the wheels of all the business that was transacted by the concern having deposits there, increased unemployment and misery. The failure of a saving bank, although not having the direct effect upon business in general as that of a commercial bank, brings within its train the pauperizing of all the depositors, who particularly during times of crisis look upon the few dollars saved during the seven fat years to tide them over the present lean years. More so than the bankruptcies of ordinary industrial and commercial houses, bank failures – because of the wide spread tentacles of modern financial capital – although also an effect of industrial crisis, add new fuel of a most highly inflammable nature to the economic catastrophe.

The importance to Capitalism of a sound financial system cannot be underestimated. It is for that reason that they have been so quick to apply any remedies that they hope may relieve this growing infection. The R.F.C. is but one of many, the most grandiose one of all. There are the Mutual Aid Plan of the New York State Savings Banks; there is the National Credit Corp – but as even the bankers admit, they have not been of much help. Of the present scheme, all that can be said is, that although it may succeed in helping through the coming few months the smallest and weakest of the banks, no too great bank liability can he secured with it.

The Trends to Be Counter-Balanced

The present bank crisis hinges on many important trends. The Federal Reserve System though its rediscounting power of short term loans helps the banks to overcome the failure of the industrialist to make good on his loans. The R.F.C. was created for the purpose of counterbalancing those features of the bank crisis – those of a long time trend. (1) the collapse of the real estate market; (2) the sharp drop in railroad bonds; (3) the defaulting of the European and the South American countries (Aside from the increase in stock holdings, accompanied by their subsequent decline in value). The act has as its avowed intention the alleviation of any weaknesses displayed by the banks as a result of the first two of the tendencies enumerated above. Of course, this will at the same time lessen the effect of the defaulted foreign bonds.

The importance of these trends upon the bank situation can be easily observed by a glance at the asset sheets of the large banks of the country. Thus the Bowery Savings Bank, the largest savings bank in the country, lists out of the total assets of $535,000,000.

Mortgages

$204,000,000

Railroad bonds

94,000,000

The books of commercial banks would also list large bond holdings. The complete collapse of the real estate boom of the prosperity era brought with it a consequent depreciation of the value of a goodly percentage of all mortgages. The totality and depth of this shrinking away of values can be gathered, to a slight extent, from a recent survey of mortgage bonds throughout the country. Of a total of ten million dollars outstanding, three billion would have to stand a loss of approximately 42%; two and one half billion losses of 18%. The merchant and worker unable to pay the high rents of 1928 and 1929, the real estate owner unable to pay the interest on the mortgage and the same with the farmer; the bank unable to pay its depositors. This is the picture presented.

In the field of railroad bonds the situation is exactly as serious. More than 70% of all railroad bonds are held by banking and similar institutions. The severe decline in the net income of railroads, dropping from $1,284,000,000 in 1929 to the low of $534,000,000 for 1931, brought about a consequent decline in the railroad bonds. In 1931 alone, to say nothing of the sharp decline of the last few months of 1930, railroad bonds have experienced a decline of 25 to 50 percent. Of course, there are various remedies that are being experimented with now, to increase railroad income. Namely: the rate increase recently granted, will succeed in bringing in an additional profit of $100,000,000; the second, if put into reality, another $200,000,000; while the amount of bond interest not being earned now is estimated at $75,000,000. The holder of railroad bonds and securities might put much hope in these prospective increases, were it not for the realization that very little replacing of fixed capital, very little of necessary repairs to locomotives and cars has been done during the past year. Were the actual balance sheet to be drawn, it would be much worse than it now appears; for money that should have been used for replacement purposes, has been used for dividend purposes to the stock and bond holders. The proposed savings of $300,000,000 is already being balanced against replacement of worn equipment. Only a substantial increase in the total haulage of the railroad of the country can return to them a portion of the income of the prosperity days. This increase in haulage is dependent upon a general improvement on the business situation as a whole.

The third unstable factor is the defauIting on both the European and on Latin-American markets. The vastness of this item is impossible to determine, but when we consider the countries defaulting – countries in which the American banker has been investing his funds for the past decade, an inkling of the size of the canvas can be obtained. In a recent statement of the Chase National Bank, it was pointed out that approximately 3½% of the total resources of one bank consisted of German credits (with Germany on the verge of defaulting). Adding to the above the loans to the S.A., and European defaulting countries, brings the total to a far from negligible item on the asset sheet. A general all-around, world wide refusal to pay, as seems to be imminent, would seriously impair the condition of the American banking institutions.

The above are the conditions that the creation of the Reconstruction Finance Corp. is to remedy. Even the leading financiers of the country are very skeptical as to its value. “Sixty billion dollars in values lost during the past three years cannot be repaid by two billion.” The Annalist of January 15, 1932, uses the phrase “There is no real remedy for this depreciation in security value, except the restoration of earning power.” In referring to the recent measure they say, “the business depression cannot be cured by such measures.” Recognizing the truth of the above statements, one must search elsewhere for the explanation of the creation of this present Corporation.

A Dole for Bankers – Starvation for Workers

The bill has been described as a “two billion dollar bill to relieve bankers’ mistakes.” The explanation of the above is easily seen by a careful reading of the measure as passed. The initial capital is to consist of $500,000,000: the remaining 1½ billion is to be made up through the sale of bonds, but and this is the all inclusive but, “the said obligations are to be fully and unconditionally guaranteed as to interest and principle by the United States,” by the government. In other words, the U.S. government has agreed to buy two billion dollars worth of depreciated and worthless paper from the banks and railroads. The proper title for the measure should have been “The Bank Subsidy Bill of 1932”.

All this by itself is nothing new. Big business repeatedly attempts to secure the aid of the class as a whole for its own particular enterprises. The whole campaign to dump the reparations into the Atlantic revolves around the question of aid by the capitalist government to a particular group, the bankers. The present plan has exactly a similar character.

The latest patch has been applied to our industrial and financial system. Two billion dollars have been diverted from the taxes to aid the bankers and railroaders in their present “sore plight”. Although the measure may have a temporary effect, “there is obviously no real remedy for this depreciation in security values except the restoration of earning power.” The trend out of the present crisis must occur in the industrial field, in the field of manufacture. Without a pick-up for industry as a whole one can expect to begin hearing before long of a new scheme to restore confidence and return prosperity.

To the millions of unemployed workers, the government refuses the slightest aid. But to the financial oligarchy it is prepared to lend its entire machinery. As the court-jester of American capitalism, Will Rogers, intimates: The government is always ready to help those who do not need it – those who do, the working class, will have to wrench it from them in the course of the struggle against capitalism, for its eventual overthrow.